Car Finance – which option is right for me

The main options to buy a car are – personal loan, chattel mortgage, commercial hire purchase, finance lease, novated lease operating lease. Let's quickly explain these:

A personal loan is similar to a chattel mortgage. The lender lends the money for the purchase of a car and normally takes security over the car. There are some advantages to this such as fixed repayments, lower rate when loan is secured, loan term matches depreciating life of vehicle. For example, a 4 or 5 year term often coincides with the minimum period most people keep their cars.

Commercial hire purchase is where the Lender buys the car and hires it to the borrower. This has advantages such as no GST on repayments.

Finance leasing is where the lender buys the car and hires it. At the end of the agreed period the driver is generally given the option to purchase the car for the residual amount. Both are available where the vehicle is predominately for business purposes.

Operating leasing is similar, however there are no risks associated with ownership, no residual payment.

Novated leasing is where an employee agrees to salary sacrificing a set amount out of their package which covers the costs of the vehicle this option can be used for 100% private use. With this option employee normally has full choice of what car they buy.

We see many clients who enter into loan contracts that result in "Negative Equity" this is a term used when the residual value of the car (the amount agreed as a balloon) is more than what the car is worth towards the end of the term. This generally comes about due to desire to keep repayments down (the higher the balloon, the lower the repayments) these transactions are often entered into when the emotion of buying the new car is high, they are often very much regretted.

The final option clients talk to us about adding the loan for the car to their current mortgage. This has one advantage – it keeps the repayments down that is if you have a mortgage of $300K over 30 years @ 5% your repayments are $1,610 pm. If you increase your loan by $30K for a new car then your repayments will increase by only $161pm. If you take a separate loan for the $30K over a 4 year period your repayments will be $730 pm – more than 3 times as much. The disadvantages in this strategy however far outweigh this. They are:

–You are effectively paying off a car over 25 years, but whilst it is extremely doubtful you will have the car for 25 years you will have the repayments.

–You are effectively using equity in your home. I.e. In the case of the home loan option the bank will require the $30K to be secured in the same way your current mortgage is. This may prevent you borrowing to upgrade your current house or buy an investment property.

–If this strategy is your preferred method what are you going to do when you want to upgrade to your next car. If you add this to your home loan you are now paying off 2 cars over remaining term of loan.

Whatever your circumstances you should talk to us at RFS about the right finance option for your next car/ ute/ truck/ equipment etc.